Sugar advances 43% in the Brazilian physical market in July

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   Porto Alegre, August 09, 2021 – Despite the decline in the volume of purchases, the climate risk arising from the drought and frosts kept sugar prices practically stable on the average of the month of July. The sugar market had a month of July marked by stability in the short term and maintenance of the pattern of broad and solid gains in the long term. The appreciation of more than 43% year-on-year contrasted with the 0.24% decrease in the margin from the previous month. Such volatility was possible due to the very specific combination of market scenarios for the short and long term. On a broader horizon, the month of July was marked by continued sharp annual gains, as seen in previous months. The very low statistical base of the previous year, albeit deflated, also contributed to this scenario.

    In the short term, or in the margin, from June to July, the market was unable to observe a very significant advance in its monthly averages, which continued to hover around BRL 116.00 per bag. Much of the short-term buying force that had been planned by consumer industries ended up being postponed, with the aim of neutralizing the escalation of prices towards the level of BRL 118.00 that was being drawn up to then. However, with the continuation of the drought and the occurrence of three frost events in Brazil’s Center-South, the cane supply for crystal sugar tends to become ever smaller, which will motivate a stronger reaction in prices from August onwards.

    SAFRAS & Mercado warns that the domestic demand for sugar is following its normal pattern and that the expiration of short-term supply contracts must send more industries into the market from next month. Moreover, the current crop, largely impacted by both drought and frosts, must be closed earlier than usual, by 30 to 60 days depending on the production unit, which will leave the market even more stressed in terms of supply availability of crystal sugar. One of the few vectors that can neutralize this issue is the making of longer contracts between mills and industries. Even so, the latter will be exposed to adjustments in their monthly averages of benchmark indices, which must appreciate as the earlier-than-normal off-season approaches.

     In this context, analyzing the historical comparison with already deflated data, we observe that, in June, the average trading price of a 50-kg bag of sugar with up to Icumsa 150 in Ribeirão Preto was BRL 116.06. In comparison with the same month of the previous year, there was an increase of 43.72% over the average of BRL 80.75 per bag, already deflated. Despite strong annual gains, in the margin there was a devaluation of 0.24% from the average trading price of BRL 116.33 observed in June 2021. Expanding the analysis perspective, we see that the average price of July this year is 48.64% above the average price for this period over the last five years, already deflated, which currently hovers around BRL 78.08.

    In the previous month, current prices had been 42.68% above the five-year average for the period, which until then fluctuated by BRL 81.59. As a result, the five-year average price between June and July showed a 4.30% devaluation, sharply contrasting with the retreat observed in the margin, where current prices declined 0.24%. With this, we can interpret that there was an increase in the distance between the current price level and its historical average due to the expansion of the low of the 5-year average.

    For the month of July, SAFRAS & Mercado expected prices to be around BRL 118.00, which was 1.68% above the effective average price of BRL 116.06 for the period. For the month of August, SAFRAS & Mercado expects average prices to be around BRL 118.00, which must mean highs of 39% YoY, 1.68% in the margin, and 54% on the average prices for the last five years.

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